The recent fluctuations in the financial markets, triggered by President Donald Trump’s trade war, may present a critical turning point for foreign investors contemplating US asset ownership. Phillip Swagel, director of the Congressional Budget Office (CBO), expressed concerns regarding the lasting effects of these developments.

Market Volatility: The Catalyst

Swagel, speaking with the Financial Times, noted that the volatility experienced in April, particularly following Trump’s tariff announcement on April 2, led to a remarkable 15% decline in the S&P 500 and increased borrowing costs. While market stability returned after a pause on some tariffs, worries persist about ongoing policy unpredictability.

The Attractiveness of US Assets

Despite recent challenges, American equities continue to outperform global markets, making them attractive targets for international investors. Swagel emphasized that foreign investment is crucial for US economic growth, job creation, and managing the national deficit through financing government debt.

Evaluating Future Implications

The CBO is preparing a comprehensive assessment of the Trump administration’s economic policies, set for release in the summer. This report will shed light on whether the recent decline in asset appeal is a permanent shift or a fleeting issue overshadowed by beneficial policies like tax cuts and deregulation.

Swagel remarked, “Will we look back at this as the sort of tipping point that really led to big changes in the global economy and a diminished role for the US?” He outlined various scenarios for the future, including a possible return to growth or a prolonged period of slower economic performance.

Recent Developments and Future Outlook

While the US recently secured its first trade agreement with the UK since initiating the trade war, concerns over negotiations with larger partners persist. The business community awaits the outcomes of proposed tax reforms and deregulation efforts to gauge their potential impact on the economy.

Swagel expressed relief at a shift from exceedingly negative sentiment among global financial officials to a more cautious wait-and-see approach. However, he highlighted that an ongoing hesitation from investors could ultimately weaken the dollar.

Government’s Fiscal Position and Challenges

In addressing the implications of tariffs, the Trump administration acknowledges potential short-term economic pain, viewing it as a necessary step to revitalize domestic manufacturing while anticipating increased revenue to alleviate the federal deficit. Treasury Secretary Scott Bessent aims to reduce the deficit to 3% of GDP by the end of the president’s second term, down from its projected 6.4% in 2024.

Swagel noted that achieving this goal is plausible if there is a combination of robust growth and spending discipline, though the specifics of economic impacts remain uncertain.

Looking Ahead

The CBO is currently waiting for the passage of a critical budget bill to fully understand the effects of new policy directions. Historical forecasts indicated a significant rise in US debt over the next decade, further complicating the fiscal landscape.

Swagel concluded, “We just need to wait and see what comes out,” indicating that future projections will largely rely on interest rate trajectories and potential budgetary constraints.